Exports, foreign aid and economic growth: the case of Tanzania

Exports and foreign aid play an important role of enhancing economic growth of a less developing country like Tanzania. In brief, they both fulfill that role through enabling a country to import essential goods and services which are not or are inadequately produced domestically, but increase the productive capacity of the economy and also enhance technological progress. Often, in performing that endeavour, foreign aid complement export earnings whenever they fall short of import requirements. Tanzania’s export performance, which is mainly based on export of primary commodities, has not been impressive especially since the 1970s. Exports declined both in volume and value terms, even when the terms of trade were favourable. Declining export earnings coupled with a rising import bill a less locally generated savings compared to investment requirements, forced Tanzania t fill the ensuring resource gaps using foreign aid. For this reason, foreign aid inflow registered a trend opposite to that of exports (except for some years in early 1980s when they both declined, thus contributing to a serious economic crisis that is persistent to date). To his effect, it can be inferred that neglect of exports, and relatively easy availability of foreign aid, made Tanzania to depend more on foreign aid inflow, until it became further unsustainable. Against such background, this study examines the impacts of exports and foreign aid on economic growth (as represented by change in GDP or GDP growth) both individually and jointly, in order to determine their relative importance. In doing so, the study also weighs the validity of the traditional belief on the relationship between exports, foreign aid and economic growth, thus contributing to the ongoing debate on what actually is their relationship. The impact of other important variables that may influence economic growth is also investigated. These variables are construction (proxy for domestic savings) and weather. In the analysis the study uses 1966-1985 as a sample period, and employs the conventional Ordinary Least Squares (OLS) technique in estimating single equation linear models. Empirical results verify the traditional belief that exports, foreign aid and construction (domestic savings) influence positively economic growth. Exports seem to influence economic growth more than a complementary foreign aid, which is also observed to be highly linearly correlated with construction. The negative impact of weather on GDP growth suggests that unfavorable weather has negatively affected economic growth of Tanzania in the period user review. Accordingly, the following suggestions relevant to policy making can be deduced. First, in order to bring about a sustained and self-reliant economy, expansion and promotion of exports should be given due respect. Foreign aid, though necessary in the short-run as a complement, should be discouraged as country approaches self-reliance. Second, there is need to increase domestic savings mobilisation if dependence on foreign aid to finance capital goods imports for domestic capital formation is to be reduced. Such a move will also reduce balance of payments problems arising due to massive imports (financed by foreign aid) compared to exports, if capital goods are financed domestically. Finally, diversification of exports to increase production of manufactured products and services as well as a variety of primary commodities is a necessity if worries about the effects of poor weather on performance of the economy are to be reduced. After all, manufactured goods have higher demand at the international market due to their higher income elasticity of demand, provided they are of good quality.